* Global Stocks Plunge *


Richard Moore

"Where the bottom is now is anyone's guess," said Wesley Fogel, a market 
strategist for HSBC.


Global Stocks Plunge as U.S. Crisis Spreads
Sell-Offs on All Major Exchanges
By Neil Irwin and Zachary A. Goldfarb
Washington Post Staff Writers
Tuesday, January 22, 2008; A01

Stock markets around the world plummeted yesterday as a financial crisis that 
began in the market for U.S. home mortgages spread to almost all corners of the 

U.S. markets were closed for Martin Luther King Jr. Day, but all the world's 
other major economies experienced sell-offs. Stock prices fell more than 7 
percent in Germany and India, 5.1 percent in China, 5.5 percent in Britain and 
3.9 percent in Japan. Many countries experienced their worst market declines 
since Sept. 11, 2001, and the only country whose stock market rose was Sri 

Asian markets continued their steep drop today, with Japan down 4.4 percent in 
morning trading. As the market opened in India, shares fell nearly 10 percent, 
triggering an automatic halt to trading.

"Where the bottom is now is anyone's guess," said Wesley Fogel, a market 
strategist for HSBC.

Officials at the Treasury Department, in the Federal Reserve system and at major
stock exchanges worked the phones yesterday -- calling one another and their 
counterparts around the world. They were preparing for what looks likely to be a
volatile week on Wall Street: Futures markets yesterday forecast a 4.5 percent 
drop in the Standard & Poor's 500-stock index when exchanges open this morning.

A Treasury spokeswoman said only that the department is always monitoring 
markets and in touch with participants. A spokeswoman for the Fed declined to 

The markets fell as fears spread that massive losses on loans made to U.S. home 
buyers would cascade through the world financial system. Some of the firms that 
play important, but usually invisible, roles in the global financial 
architecture are turning out to be exposed to the downturn in the housing market
in such a way that their ability to function is threatened.

The companies that insure bond investors against defaults are having to make 
massive payouts. One, ACA Financial, owes $60 billion that it cannot afford to 
pay and has been taken over by the Maryland insurance regulator. Its credit 
rating has been lowered.

The problems among bond insurers have meant that a wide variety of financial 
institutions cannot count on receiving payments due them, causing further 

Other news yesterday shows just how widely the damage has spread. A Chinese 
newspaper reported that the Bank of China is exposed to subprime U.S. mortgage 
loans to a degree it had not previously disclosed and may have to write down the
value of its $8 billion in such investments. Several large European banks have 
taken similar hits.

Those losses could have importance beyond the hit they cause to the banks' share
prices. Banks and other financial institutions play an important role in an 
economic downturn: lending to businesses and consumers so they can help the 
economy get back on track. The multibillion-dollar losses could make them unable
to play that role.

Moreover, foreign investors have been plowing capital into U.S. banks to help 
them continue lending, which made the losses particularly worrisome, some 
analysts said.

"Those infusions of capital have been crucial to maintaining performance to 
date," said Joseph Mason, a finance professor at Drexel University in 
Philadelphia. "If foreign investors should significantly retreat from U.S. 
markets, that leaves us to our own recovery. In that case, the current credit 
crunch will continue to bite and we maintain a very high risk of recession."

Many economists have argued that continued growth in the rest of the world -- 
especially in fast-growing markets like China -- will help ease the pain of the 
slowdown in U.S. growth.

With their houses less valuable, U.S. consumers may start spending less, goes 
this logic, while Asian and European consumers will do just fine, preventing a 
global economic slump. Yesterday, analysts worried that this theory won't hold 

"People are scared, and they are reacting with behaviors which are based on 
psychology," said David Kotok, investment chief of Cumberland Advisors. "Some of
that can be seen in the stock market, but they are also changing consumer 

Many market analysts argued that stock markets in developing countries have 
appeared to be overvalued for some time, which would suggest that some of the 
market declines were necessary. For example, even after yesterday's 5.1 percent 
drop, the Shanghai composite index in China has risen more than fivefold in the 
past three years, sparking worries of a bubble.

"Many of the markets, especially the European and Asian markets, have been 
priced for eternal growth," said Axel Merk of the Merk Hard Currency Fund.

European officials stressed the underlying strength of their economies, arguing 
that they can continue to thrive despite weakness in the American economy.

"It seems that the markets are considering the possibility of a more pronounced 
slowdown, even a recession in the U.S.," European Union Monetary Affairs 
Commissioner Joaqu¿n Almunia told reporters yesterday. "I hope they will pay 
attention also to the real information . . . because, at least in Europe, the 
economic fundamentals of our economies are sound."

Most world markets were digesting for the first time the Bush administration's 
proposal to try to stimulate the U.S. economy with tax benefits. (It was 
announced Friday, after Asian and European markets had already closed.)

Traders around the world seemed to have little faith that the plan would arrest 
the slowdown in the U.S. economy, even if some version of it is passed by 

"Foreign markets are doubtful about the ability of Congress to move quickly, and
foreign markets have watched the Federal Reserve move slowly in August, 
September, October and November," Kotok said. "So the concern from abroad is 
that the U.S. has been too slow and done too little and is now playing 

White House spokesman Tony Fratto said in a statement yesterday that, while he 
wouldn't comment on daily market moves, "We're confident that the global economy
will continue to grow, and that the US economy will return to stronger growth 
with the economic policies the President called for."

Congressional leaders yesterday acknowledged how serious the European and Asian 
sell-offs were and said they may have to rethink the size of the stimulus and 
its content. Democrats still favor tilting the package toward middle-class and 
poorer Americans, who would be the quickest to spend any tax refunds or 
government checks. But Republicans have been pushing for more incentives for 
investors and business, a possible reaction to the stock-market jitters.

"I don't want to use the word 'panicky,' but you can't look at the size of these
[losses] and not be extremely nervous," said Rep. Rahm Emanuel (D-Ill.), a 
former investment banker. Emanuel cautioned that policymakers should not be 
chasing the markets, trying to reverse losses already in the books.

Toyota and Honda were down more than 5 percent as the sharply rising yen -- at a
2 1/2 -year high against the dollar -- increased fear of slowing sales in the 
United States. "There is a sudden sentiment shift to a worst-case, most 
pessimistic view," said Naoki Kamiyama, Japan equity strategist at Morgan 
Stanley. "The market has lost faith in a second-half recovery."

Staff writers Michael Abramowitz and Jonathan Weisman in Washington, Ariana 
Eunjung Cha in Shanghai, Blaine Harden in Tokyo, Molly Moore in Paris, and Kevin
Sullivan in London contributed to this report.

© 2008 The Washington Post Company

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